- EUR / USD hit new lows on Monday at 1.1235 after Powell’s reappointment as Fed chairman.
- Markets reacted aggressively when Brainard’s dovish bets were discounted and participants bet on an aggressive Fed change.
- Since then, the pair has recovered above 1.1250.
The EUR/USD it has seen some turmoil in recent trading, dropping from around 1.1280 to new lows for the year at 1.1235, before recovering above 1.1250, where it is trading lower for the day by roughly 0.3%. The sharp decline in recent times was triggered by the news that the White House has decided to re-elect current Fed Chairman Jerome Powell for a second term. Lael Brainard, currently a member of the Fed’s Board of Governors and also promoted to the position of Fed Chairman, will take over as Fed Vice Chairman.
Aggressive reaction to Powell’s renaming
The EUR / USD move down reflects a broader aggressive market reaction to the news of Powell’s new appointment. US 2-year yields rose up to 6 basis points trading at new highs since March 2020 above 0.55% and 5-year yield increased almost 8 basis points to reach its highest level since February 2020, not far from 1.30%. Meanwhile, the December 2022 Eurodollar future (a proxy for market expectations for the federal funds rate) fell 10 basis points to new lows for the year at 98,965, after closing last Friday at 99,065. That means markets are pricing 10 basis points in addition to rate hikes by the end of next year, now that Powell has been renamed for a second term.
This reflects a relaxation in the “moderate risk” presented by a possible Brainard nomination. A Fed under Brainard would have been expected (by most market participants) to have a greater tolerance for a longer overshoot of its inflation target and to place more emphasis on the recovery of the labor market. It may also reflect the fact that, with his reappointment almost assured (he should easily be approved as Fed chairman again in the Senate), Powell can now radically change policy without fear of upsetting the White House.
EUR / USD against the ropes
A rebuilding of aggressive Fed expectations adds to the growing stack of reasons favoring a further decline in the EUR / USD pair. As the pandemic in Europe worsens and Germany nears closure (Chancellor Angela Merkel called for tighter restrictions on Monday), the eurozone economy is expected to take a hit in the fourth quarter of 2021. This adds more reason to Let the ECB be moderate. The bank was already meekly insisting that it would not react to what it sees as a temporary rise in inflation and can now use economic weakness related to the lockdown / pandemic to further justify this stance. Some are calling for the PEPP QE program to be extended in March, as the emergency phase of the pandemic will not yet be considered over (condition for program completion).
The next key support area lies at the 1.1140-1.1170 region, an area that will be closely watched by many of the bears. But technicians note that the EUR / USD is now heavily oversold, with its 14-day Relative Strength Index (RSI) score now back below 30.00. A technical correction in the next few days back to 1.1300 could be on the cards, but ultimately it can be seen as an opportunity to reload shorts.
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